14A

[CA.BHUPENDRASHAH]

 

I-T- Sec 14A - assessee can claim deduction of interest paid on borrowed funds utilised for acquisition of shares only if shares are held as stock-in-trade and not investment: HC

ERNAKULAM, AUG 05, 2010: THE issue before the HC is - Whether the assessee is entitled to deduction of substantial amount paid towards interest on borrowed funds utilised for acquisition of shares in a company in which assessee over a period of 10 years,acquired controlling interest upto 90%.

Facts of the case

Assessee is engaged in trading of goods. The assessee paid Rs 17,44,310/- towards interest at 24% p.a. on funds borrowed for purchase of shares in a company. The company in which assessee made investments was engaged in leasing of household articles and assessee as proprietrix of the business sold such articles to the said leasing company. The said company was registered in 1991 and assessee started acquiring shares ever since its formation, and by the year ending 31st March, 2001, acquired 90% shares. The assessee's claim was that since the borrowed funds were utilised for acquisition of shares of the company under the control of the assessee, the utilisation of borrowed funds was for business purpose entitling it for deduction of interest u/s 36(1)(iii).

Brushing aside the contention of the Assessee, AO held that the assessee made investments by utilising borrowed funds in the form of acquisition of shares in the company and the only benefit assessee got was dividend income. On the basis of Section 14A, the AO disallowed the claim of interest paid by the assessee during the accounting year for the funds borrowed for the acquisition of shares in the leasing company. CIT(A) confirmed the assessment.

The Tribunal relying on decision of the Supreme Court in S.A.BUILDERS LTD. VS. COMMISSIONER OF INCOME TAX (APPEALS) (2006-TIOL-179-SC-IT) substantially allowed the claim, but made a disallowance of Rs.2 lakhs being the interest stated to be attributable to the dividend income of Rs.3 lakhs earned by the assessee from the leasing company during the previous year.


Having heard the parties the High Court held that,

++ assessee is entitled to deduction of interest u/s 36(1)(iii) on borrowed funds utilised for the acquisition of shares only if shares are held as stock in trade which arises only if the assessee is engaged in trading in shares. So far as acquisition of shares is in the form of investment and the only benefit assessee derived is dividend income which is not assessable under the Act, the disallowance u/s 14A is squarely attracted and the AO, rightly disallowed the claim.

[CA.BHUPENDRASHAH]

S. 14A, Rule 8D & Daga Capital: Judgement Pronounced!
The Bombay High Court today (12.8.2010) pronounced judgement in Godrej & Boyce vs. DCIT, the lead matter challenging the judgement of the Special Bench of the Tribunal in ITO vs. Daga Capital 117 ITD 169 on the applicability of s. 14A & Rule 8D.


The core aspects of the judgement are the following:



(a) The argument that s. 14A does not apply to shares and units because (i) the income there from is not "tax-free" in view of the 'dividend distribution tax' paid by the payer & (ii) the potentiality of taxable income arising on sale thereof is not acceptable because the dividend distribution tax is paid by the company u/s 115-O on its own account and not on behalf of the shareholder;



(b) Section 14A(2) & (3) are constitutionally valid;



(c) Rule 8D is NOT ultra vires s. 14A;



(d) As Rule Rule 8D was introduced w.e.f. 24.3.2008, it is prospective and applies for AY 2008-09 and onwards;



(e) For assessment years where Rule 8D is not applicable, the AO has to apply s. 14A on a "reasonable basis";



(f) On facts, the matter was remanded to the AO for reconsideration in the light of the law laid down.

[Pankaj]

Now based on this judgment Department will be disallowing expenses as calculated under rule 8D. The same may be very harsh for some comapny.

Will now department also apply this section when during the year their is no exempt income OR will the disallowance may be more than the expenses claimed??